Inheritance tax in 2021-22 was £6.1 billion, increased by £729 million from £5.4 billion the year before.
What is Inheritance Tax?
IHT is a tax on the estate (the property, money, and possessions) of someone who’s died, if the value of the estate is above the current tax thresholds, known as the nil-rate band and residence nil-rate band.
The tax is paid by the estate but affects the amount beneficiaries could receive.
How may you be affected by Government changes?
Families paid out £326 million more in inheritance tax (IHT) last year after HM Revenue & Customs implemented more rigorous checks on underpayments. Investigators raised 28 per cent more tax in the 2021-2022 tax year than in the year before. HMRC launched 4,258 investigations in 2021/2022 to recover unpaid tax from bereaved families.
The amount families are paying in IHT is rising as the £325,000 nil-rate band threshold has not increased since 2009. The introduction of the residence nil rate band in 2017 increased the tax threshold in certain circumstances however the maximum threshold of £175,000 has not increased since 2020.
One in 25 estates are liable for IHT and it is estimated that this figure will rise.
Who is responsible for paying Inheritance Tax?
If there is a Will, the Executor will be responsible for paying IHT from estate monies. If there is no Will the administrator of the estate will be responsible for ensuring the IHT is paid. The Beneficiaries of a Will do not pay IHT on what they inherit and it will have been paid prior to the distribution of the estate, but may have to pay income tax on rental income if they inherited a house.
How can you mitigate Inheritance Tax?
IHT can be reduced through a variety of methods.
If you give gifts of up to £3,000, this will be tax-free and covered by annual exemptions. For example, this may include payments to help with living costs or birthday gifts.
If you give gifts of £3,000 or more, these may be subject to the seven year rule meaning these gifts will count towards the value of your estate.
If you die within seven years of gifting, then the gift will count towards your nil-rate band meaning it may be subject to IHT.
You will pay less IHT, the longer you live after the gift is made and you could be charged IHT if you give away more in the seven years before your death.
You may also choose to give away gifts to charity which can help mitigate Inheritance Tax. If you choose to give away gifts to charity in your Will, these gifts are free from IHT. If the gifts equal to 10 per cent or more of your estate, you also reduce the rate of IHT from 40% to 36%.
Other ways which may allow you to lower your IHT liability include trusts, Business Property Relief, and Agricultural Property Relief.
If you need advice on Inheritance Tax, contact us today.
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